Baxter International Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with Q1 2017 unless noted. Figures are in U.S. dollars. Interim statements are unaudited and results may not indicate full-year performance.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $2.677 billion | $2.475 billion | +8% reported; +4% at constant currency |
| Gross margin | $1.114 billion; 41.6% | $1.044 billion; 42.2% | Margin down 0.6 percentage points |
| Operating income | $432 million | $353 million | +22% |
| Continuing-operations income | $389 million | $273 million | +43% |
| Diluted EPS | $0.71 | $0.50 | +$0.21 |
| Operating cash flow, continuing operations | $447 million | $206 million | +$241 million |
| Capital expenditures | $155 million | $123 million | +$32 million |
Cash and equivalents were $2.947 billion at March 31, down from $3.394 billion at year-end 2017. Long-term debt and lease obligations were $3.550 billion, with $3 million current; cash exceeded reported debt by approximately $606 million. Total assets were $16.890 billion and equity was $9.093 billion. The current ratio was approximately 2.6.
Cash flow from investing was an outflow of $374 million, including $219 million for acquisitions and investments. Financing cash outflow was $545 million, including $522 million of share repurchases and $87 million of dividends. Cash decreased by $447 million during the quarter.
Material changes and business performance
- Foreign exchange favorably affected sales growth by approximately four percentage points. Management attributed constant-currency growth to business performance, including renal growth and pharmaceuticals; Claris contributed $36 million of Q1 sales. U.S. cyclophosphamide sales declined to $42 million from $47 million.
- Sales rose across Americas ($1.442 billion, +5%), EMEA ($724 million, +15%) and APAC ($511 million, +8%). Pharmaceuticals grew 13% at constant currency; Acute Therapies grew 14%, with an approximately seven-point contribution from a strong flu season. Medication Delivery was flat at constant currency.
- Gross margin fell despite higher sales. Management cited foreign exchange, Hurricane Maria-related lost sales and incremental supply-chain costs, partly offset by operational expansion. Marketing and administrative expense was 23.2% of sales versus 22.8%; excluding special items, management said cost-rebasing and expense controls improved the ratio.
- Q1 income benefited from an $80 million Claris-related settlement, reported as a Claris settlement benefit. Management said special items increased 2018 continuing-operations income by $1 million, or $0.01 per diluted share, versus reducing 2017 income by $45 million, or $0.08 per diluted share.
- The effective tax rate was 11.2%, versus 16.8%, reflecting several discrete benefits, including a U.S.-Germany transfer-pricing settlement and reversal of a Brazilian valuation allowance. Management noted ongoing refinement of provisional accounting for U.S. tax reform.
Outlook, risks and unusual items
- No specific full-year revenue or EPS guidance is stated in the supplied filing text. Baxter expects approximately $2.8 billion of remaining performance obligations to be recognized as revenue: about 25% in 2018, 27% in 2019 and the balance thereafter.
- The company expects approximately $975 million of annual pretax savings from business-optimization initiatives; about 90% is expected by year-end 2018 and the remainder by year-end 2020. Through March 31, 2018, it had incurred $614 million of pretax costs and expected a further approximately $200 million of costs and $50 million of capital expenditures through completion.
- Hurricane Maria reduced Q1 sales by approximately $25 million, although Puerto Rico facilities had returned to pre-hurricane production levels. Management cited ongoing infrastructure challenges.
- Regulatory and product-quality matters include FDA observations at acquired Claris facilities and a longstanding FDA Warning Letter concerning North Cove and Jayuya facilities. The filing also describes an antitrust class-action matter and DOJ and New York investigations concerning IV-solution manufacturing, sales, pricing and shortages. A separate qui tam complaint concerns product discounting and promotion. Baxter says it is cooperating where applicable; outcomes and potential losses are uncertain.
- Legal reserves were $37 million at March 31. Management said certain additional losses cannot be estimated and that resolution could significantly affect results or cash flows in a period, while not expected to materially adversely affect consolidated financial position.
- Other notable items: the ERP software useful-life estimate reduced depreciation by $6 million and increased net income by $4 million ($0.01 per diluted share). A U.S. pension-plan change reduced projected benefit obligations by $57 million, with an offsetting AOCI adjustment. Baxter repurchased 7.7 million shares for $522 million and had $2.1 billion remaining under its authorization.
Most important facts for investors to verify
- How much of sales and earnings growth is sustainable after separating currency effects, acquisitions, the $80 million Claris settlement, tax benefits and other special items.
- Whether margin recovery can offset the disclosed supply-chain, foreign-exchange and hurricane impacts, and whether the expected cost savings arrive on schedule and at the stated cost.
- Progress and financial consequences of FDA remediation, IV-solution antitrust and government investigations, and other litigation or regulatory matters.
- Cash conversion and working-capital trends: inventory rose to $1.581 billion, days sales outstanding increased to 54.4 from 52.4, and operating cash flow benefited from year-over-year differences in payables and other items.
- Acquisition performance and remaining obligations, including Claris and the RECOTHROM/PREVELEAK products; the latter acquisition’s purchase-price allocation was preliminary.
- Management’s tax-reform estimates and credit exposure: public-sector receivables in Greece, Spain, Portugal and Italy totaled $137 million. The interim financial statements received an independent accountant’s review, not an audit opinion.